Monday August 29

Stocks advanced as rates moved back from their Friday highs. The S&P 500 rose 0.5% to 2,180 and the Dow Jones rose 0.6% to 18,502. Financials shares outperformed the market rising 1% on higher rate expectations. Economic data today showed that personal income and outlays came in in line with expectations. Personal income rose 0.4% over the month, consumer spending rose 0.3% on the month, and the PCE price index was unchanged on the month. In Japan the Nikkei rallied after the BoJ governor came across as dovish at the Jackson Hole meeting. The yen fell to Y102.18 and the Nikkei rose 2.3%. The US dollar finished at $1.1176 against EUR and $1.3096 against GBP. The 10 year Treasury yield fell 5bp to 1.58% and the 2 year fell 2bp to 0.83%. The spread between 10s and 2s bull flattened to 75bp. WTI finished at $47.09 and Brent at $49.34.

Analysts are expecting the IPO market to make a comeback after a sluggish start to the year. In a variety of ways IPOs are viewed as a gauge of health of the market. The number, size, reception, and performance of IPOs all can be indicative of market health and risk appetite. As the stock market has rallied in recent weeks that appetite may be coming back. A the start of the year low oil prices, concerns in China, and in the summer Brexit all hampered IPO appetite. As those concerns to an extent have subsided IPOs are ready to make a comeback in the window between now and the Presidential election later in the fall. Valvoline is expected to IPO, along with software company Nutanix, a Carlyle Backed bank, a commercial bank based in Bermuda, a cosmetics company, a cooler company, an energy company and a waste disposal company. The broad representation from different industries is a good sign and is indicative of healthy demand for a variety of different sectors. Year to date there has been only $12.9bn of issuance in the IPO market, compared to over $25bn at this time last year. The $12.9bn is the lowest YTD total since 2009. New offerings will likely be received well due to technicals since supply has been so low. IPOs have performed well this year as a result of conservative pricing from investment banks, who fear that poorly received offerings will further damage both supply and demand.

Issuing bonds in Australia (Kangaroo Bonds) has become popular as borrowing costs fall. Kangaroo bond sales have risen from just $1bn in 2014 YTD to nearly $3bn this year and last year. This comes as the cross currency basis has fallen throughout the year which results in lower borrowing costs. Companies including Apple, Ford, Intel, and Coca-Cola have all issued Kangaroo Bonds recently. Large international companies such as these have been able to diversify their funding and issue bonds in markets where yields are low such as Switzerland, Japan, and Europe. There have been 365 foreign currency bond issuances this year that have raised a total of $77bn, which is up significantly from the previous two years. The relative strength of AUD vs USD right now also contributes to the funding advantage in Australia.

Homeowners who rent their homes out through Airbnb are complicating the classification between a residential and commercial borrower. When those homeowners go to refinance homes they are subject to increased scrutiny, different types of loans, and higher interest rates. Even though homeowners supplementing their income through Airbnb can have higher incomes as a result, they are still not able to get loans with lower rates. Banks often do not provide home equity lines of credit for homeowners operating a business or investment properties. Some banks have asserted that “incremental renting” is not an issue but that more substantial activity could classify homes as commercial. Banks require larger down payments, higher interest rates, and more stringent underwriting standards for investment properties that are not occupied by the owner. For owner occupied residential properties banks on average financed 84% of the purchase at a rate of 3.76%. For investment properties those numbers were 72% and 4.29% as a result for higher default tendencies on investment properties. The loss rate on non-agency MBS for investment properties is 20% compared to just 14% for owner-occupied.

Monday August 29

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